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You may have heard that people spend more time planning their annual vacations than they do planning for retirement. Whether you start your retirement planning years or weeks before that glorious day, you will follow similar steps to determine the lifestyle you can expect in retirement. This month’s newsletter looks at how to determine when you can afford to retire.

Retirement Planning

What do you want to do in retirement? The first step that I recommend taking is determining what retirement looks like to you. Previous generations used retirement to slow down life. The extent of their retirement may have been watching television and taking an annual cruise. As they have with so many other things, Baby Boomers are rebelling against the standard and redefining retirement. Many retirees are now starting new careers, working part time, volunteering, playing golf, or traveling the globe.

There is no wrong way to retire, so create your own vision. When you decide what retirement looks like for you, try to estimate an annual price tag. You may find that your expenses will be vastly different than your friends’ or coworkers’-which is okay. It’s your life, and you’ve worked hard to enjoy it.

How much income will you need? Retirement articles often state that the “average” retiree needs 70 to 80% of her current income in retirement. These figures are just that: average. Today you likely spend 40, 50, 60 hours or more between commuting and your typical work week. When you retire, you may fill that void with an activity that comes with a significant price tag.

Those same articles may also state that you will pay less in taxes during retirement. Ask anyone you know who has retired, and they may tell you that taxes are still a high priority for them. When you retire, your home may be paid off (or nearly so), you will no longer be adding to your retirement plan, and any children you may have are no longer at home (hopefully). To complicate matters, the income you receive from your 401k and pension may be taxable. If your deductions have decreased and your expenses have remained the same, you might pay more in taxes during retirement than you do today.

Where will you get the income? Unless you have a pension, the bulk of your income will likely be generated by your retirement plan (401k, TSP, 457, or 403b). Because you may need income for more than 20 years, you may decide to continue with a diversified portfolio of equity and fixed-income investments. Many people assume that this portfolio will provide them with at least a 7% return, so they immediately begin withdrawing 7% from their retirement accounts.

While receiving an average return of 7% on your investments might be feasible, this income strategy fails to plan for market downturns and inflation. If the stock market has shown us anything over the past ten years, it’s that you can see tremendous gains or significant losses in a very brief period of time.

Inflation can also play a factor. If you withdraw 7% per year and earn 7% per year, the only way you will be able to meet cost of living increases will be tapping into your principal. While most retirees find withdrawing their principal acceptable, this is not something that you will likely want occurring early in retirement.

What about Social Security? This depends on your age and faith in the government’s plans for the future. I’ve found that many people in their late 50’s+ plan on receiving Social Security and they include it in their retirement projections.

People 55 and younger have less confidence in Social Security. Some count on receiving half of their projected benefit while others, especially those younger than 50, leave Social Security out of their projections. The latter believe that if they receive Social Security it will either augment their lifestyle or increase their retirement security.

Once again, the decision is a personal one. If you are 55 or younger and have a firm belief that Social Security will exist in your retirement years, I suggest that you cautiously estimate your benefits.

When can you afford to retire? To calculate your retirement date, you need to estimate your life expectancy. Due to the advances in medical care, many now believe that projecting out to age 90 or 95 is a wise decision. I tell my clients not to worry about the date as we’ll meet once or twice between now and then. It always gets a laugh, but the joke touches one of the essential elements of your retirement plan: review your plan on a regular basis.

Another must is discussing your retirement plans with your partner/spouse. While it won’t be affordable for everyone, many want to retire in the same year as their partner/spouse. The affordability gap may be a result of a significant age difference, and age effects how we prepare for retirement. Younger investors are more likely to accept ups and downs in the market as they have a longer time horizon. Additionally, they have more time to accumulate funds. For those who are approaching retirement, the focus shifts from building to protecting their assets. You may want to find a solution that allows you both to enjoy retirement while you are young, active, and healthy.

After you assess your goals, expenses, assets, and income, you should be able to determine when you can afford to retire. In some cases, this may mean that you can retire sooner than you anticipated. For those who need to push back retirement, other options exist. By decreasing your expenses, starting a new career, and/or working part time, retirement might be affordable at a more desirable age.

Remember, retirement is unique to each individual/couple. Determine what you want for yourself and create a strategy around your goals.

The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Office

Office News

Heidi has been off to a great start as part of the Partnership Wealth Management team. As expected, nobody is happier about the new addition to PWM than Fenway and Roxy.

Heidi’s hours are Mondays, Tuesdays, and Fridays 9am-5pm.

Debbie’s hours are Mondays and Wednesdays 11am-3pm.

Office Closings

February 10th:

Because I treat my birthday like a national holiday, our office will be closing at noon on Friday, February 10th. If you have an urgent, account-related need, please call TD Ameritrade at 1-800-431-3500.

February 20th:

Our office and the markets will be closed on Monday, February 20th in observance of President’s Day. Have a safe and fun holiday weekend!

Elise went to her first show this month when we saw Daniel Tiger on stage. From the time the theater went dark until the lights came up, she was laser focused on the performance. After it ended, Elise didn’t want to leave her seat. She said that she wanted to watch it again!

Fenway and Roxy are continuing to do well. While they’re thrilled that Heidi is working at the office, they’ve been a bit anxious because they can’t easily get to her. We’re working on slowly getting them acclimated to our new routine.

I hope you enjoyed this month’s newsletter.

Best Wishes,

Woody Derricks, CFP®

President

CA Insurance License #0C40217

Available by Appointment in Alexandria & DC

Partnership Wealth Management is a comprehensive financial services company. We are committed to providing our clients with financial planning and wealth management services to help them make the most of their investments. At Partnership Wealth Management we have a long history of working with the LGBT community. Among our many services we offer financial planning for gay couples and lesbian couples as well as estate planning for gay couples and lesbian couples. Financial planning is an important part of preparing for the future, contact us today to get started: www.partnershipwm.com.